New York, 7 January -- Eurasia Group President Ian Bremmer and Head of Research David Gordon are pleased to announce this year's Top Risks report, which identifies the key geopolitical areas to watch for global investors and market participants in 2013, as well as few "red herrings": issues that, despite media attention, Eurasia Group does not perceive will pose any significant threat or instability in the coming year.
Emerging Markets take top billing in the 2013 list. As this year marks the end of the global financial crisis that began in 2008, attention will now shift from the developed back to the developing world. "For the past five years, emerging markets have accounted for two-thirds of the world's growth," say Bremmer and Gordon. "Yet in a g-zero world with an absence of global leadership and geopolitics very much 'in play,' everyone will face more volatility. That will prove a much bigger problem for emerging markets than the developed world, which has proven its resilience in the wake of the challenges of the past four years."
Following is a summary of all ten Top Risks for 2013. For the complete report, please click here. A podcast on Top Risks 2013 can also be downloaded on iTunes.
1. Emerging Markets - The era of Emerging Market abundance is finished. As the US and Europe slowly regain their economic footing, the political risk focus will return to the emerging market world, where differences among the largest players will become more obvious. Slower growth and rising expectations from larger and more demanding middle classes will create public pressure on governments, meaning that emerging markets-including the increasingly suspect BRICs-should no longer be treated as an asset class for outsized growth. Consideration instead should shift towards which developing country governments have enough political capital to remain on track toward a more advanced stage of development.
2. China vs. information - China's new leadership faces many challenges in 2013, most importantly the state's growing inability to control the flow of ideas and information across borders and within the country. Until now Beijing has been largely effective in isolating online discourse to focus on discrete issues without culminating in real challenges to the government's decision-making or policy. But every corruption scandal and example of official malfeasance makes the next event more difficult to navigate, and the risk is that a broad-based social movement for change will gain momentum in China in 2013, distracting the government from its domestic and foreign policy priorities and potentially weakening investor confidence in the stability of the mainland market.
3. Arab Summer - We are far beyond the Arab Spring, and an Arab Winter, where dictators rebound and consolidate power, has not manifest. Instead we are approaching an Arab Summer, whereby the region will witness further radicalized movements-both sectarian and Islamist-playing a much more important role. As outside powers look to avoid direct involvement in the region's risks, local powers-Iran-Turkey-Saudi Arabia and others-will compete for influence and play out their rivalries. At the center of this lies Syria, whose civil war now has implications that extend far beyond the humanitarian. Syria has become a proxy conflict for Shia and Sunni powers, as well as a magnet for Jihadists, increasing the geopolitical risk overall and sparking further insecurity throughout the region, most notably in Irag, Jordan and Turkey.
4. United States - Every silver lining has a dark cloud. While the fiscal cliff was averted, the process by which the deal was reached casts a large shadow over hopes that the election might create a more conducive environment for cooperation, and dysfunctional American politics will weigh on both the US economic recovery and President Obama's legislative agenda. This is not about a politically induced new recession, let alone a major financial crisis, but political uncertainty over corporate taxes and a series of noisy brinkmanship episodes will generate a modest but real drag on growth.
5. JIBs (Japan, Israel, Britain) - There are three current global trends that matter most: China is rising, the Middle East is exploding, and Europe is muddling through. Set against a g-zero backdrop, the structural losers of these trends are the JIBs-Japan, Israel and Britain-countries impacted most directly and problematically by changes now underway in the geopolitical order. All three countries are now in a similar position for three reasons: their special relationships with the United States are no longer quite as important; they sit just outside the major geopolitical changes underway, without the means to play a constructive role; and key domestic constraints in all three countries (political, social, historic, and otherwise) make it particularly difficult for them to respond effectively to the challenges posed by a shifting global order.
6. Europe - There will be no grand implosion, but the muddle-through approach to crisis management carries risks of its own. The Eurozone is headed for neither break-up nor resolution, and in 2013 the risks shift from threat of financial crisis to a loss of momentum in creating the institutional and policy frameworks for a redesigned union. The weak economic outlook and the politics of crisis-fighting will also remain sources of uncertainty, while simultaneously euro-skepticism is on the rise, and resistance to reforms increasing in the face of protracted austerity and few prospects for an economic turnaround.
7. Asia geopolitics - In 2013 geopolitical risk will continue growing in East Asia in a new, and potentially more dangerous, way. Facing increased nationalism in China and Japan, the US will look to play a larger role, giving oxygen to the hedging strategies of many regional states seeking closer American ties. Territorial disputes over the East China and South China Seas will also create new friction, and at risk overall is the decades-long pattern of East Asia as a zone where positive-sum commerce and economics trumps zero-sum geo-political tension.
8. Iran - The significant risk in Iran this year is not the one everyone's thinking about. A strike on the country's nuclear program is unlikely, but biting sanctions, other forms of international pressure, and leadership tensions make Iran less predictable and heighten the stakes of an ongoing shadow conflict with the Israel and the United States-one with the potential to rattle markets and put upward pressure on oil prices.
9. India - India in 2013 will be one of the prime examples of the intrusion of political factors into what had until recently been seen as a long-term economic success story. The country's dysfunctional politics and looming elections feed the risk of an economic shock, and in 2013 the ability of the government to implement robust economic policies will decline even further, perpetuating India's "stalling or falling" outlook.
10. South Africa - in aggregate growth terms, Africa as a whole looks to be on a trajectory to continue its recent position of positive performance. But in South Africa-one of the continent's largest and most sophisticated economies-the outlook is far less rosy. Populism, spearheaded by the ruling ANC party, is on the rise, and it is hard to see any real movement on labor, education and budgetary reforms. Coming retrenchments in mining will almost certainly spur another bout of labor unrest, which has the potential to spread into other sectors as well, and taken together all these factors increase the risk of further credit downgrades.
In addition to these Top Risks, the Red Herrings for 2013 include the
Geopolitics of energy - 2013 isn't the year to get overly concerned about geopolitical risk spiking energy prices. For one thing, most of the Middle East risk in the coming year isn't about energy-it's about everything else-and the energy revolution happening in the Western Hemisphere will be a boon for consumers across the globe.
Global protectionism - The G20 can afford to agree on protectionism because there's less of a threat here than meets the eye. The trend, in fact, is towards hints of competitive trade liberalization, especially within the EU, which is generating a strong internal consensus on the need for a new major transatlantic economic cooperation package.
Radicalism in the developed world - Many fear the growing gap between rich and poor will instigate class warfare and cause significant instability across the developed world. We think not. For much the same reason emerging markets are the top risk this year, it's the underlying stability of advanced industrialized democracies that will come through in 2013.
European separatism - There is no doubt that there are very real separatist pressures building in Catalonia and in Scotland, and national unity remains fragile in Belgium. However-as much as we all would love to watch Barca field its own team in the World Cup-there is almost no chance that any of these issues will grow into an actual crisis leading to separation in 2013.
? - North Korea - Sometimes, you just can't know what's happening, and with North Korea in 2013 that's really the case. In the face of a sudden leadership transition in the world's most totalitarian state-now run by an untested 28 year old-it's almost impossible to assess whether North Korea is becoming more stable. All signs point to the country remaining a perilous bet, but what causes trouble and when? It's hard not to lose sleep over it, but at the same time working harder to assess what exactly is going bump in the night doesn't feel very purposeful. Sorry.
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Eurasia Group is the world's leading global political risk research and consulting firm. By providing information and insight on how political developments move markets, we help clients anticipate and respond to instability and opportunities everywhere they do business. Founded in 1998, the firm's name reveals its early focus on the Soviet Union and Eastern Europe, but today our research platform is global. Our analysts monitor political, economic, social, and security developments in Africa, Asia, Eurasia, Europe, Latin America, the Middle East, and North America. Headquartered in New York, we have offices in Washington, DC, and London, as well as on-the-ground experts and resources in more than a hundred countries. Our analysts are highly trained political scientists with extensive experience in the public and private sectors.
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